How to invest in private markets

Why include private market investments in a portfolio?

Investments in private markets provide access to selected and fast-growing markets that are not traded on a public exchange and would otherwise be inaccessible.
Before you consider investing in private markets, you should consider a few fundamentals that apply to these special types of investments.

• Fund terms are ten years and more. This means that you cannot access the capital you have invested during this time.
• Are you willing to continue pursuing your investment strategy even if your personal circumstances change? For example, you should ensure that an investment in private market assets does not significantly alter the risk profile of your overall portfolio.
• When investing in private market assets, it is crucial to have sufficient liquidity available. Especially in times of economic uncertainty, when markets fluctuate, it is important that you make the required deposits while still being able to cover your own living costs. The same applies to increased expenses. Make sure you are in a good financial position.

Find the right balance for your investment. For investors, there is a helpful rule of thumb, which is that to avoid liquidity issue you should hold less than 20 percent of your assets in less liquid investments. If you can access other liquid assets, an investment of up to 40 percent is acceptable. It is important that you carefully weigh up your investment decision within the context of your overall portfolio.

How does a typical investment in private markets work?

If you want to invest in private markets, this is usually done through funds. These are managed by fund specialists called general partners who invest and manage investors’ deposits. You should familiarize yourself with the following processes:

• Private market funds are usually closed-end funds, in other words you can only invest in them during a limited phase. Once a specified amount is reached, that is, the fundraising phase has ended, the funds are closed for the entire term. This means that you can neither contribute additional capital nor actively withdraw money. Depending on the strategy, the terms are usually between seven and twelve years, but can also be longer.
• Investors make an irrevocable capital commitment when investing in private markets. This amount does not have to be deposited immediately but is regularly called up by the general partner during the investment phase (capital call). This usually occurs within the first three to six years of a fund’s term.
• The timing and extent of fund inflows and outflows are determined by the fund management and is not something that investors have any influence over. Cash distributions usually occur from the middle of the term. Until then, the general partner has time to increase the value of the investments.
• As a rule, not all of the committed capital of investors is invested. The invested net capital may fall below the target level because distributions are already possible while the committed capital is still being invested. Historically, the level of effective net investment fluctuates between 60 and 80 percent.
• The development of payment flows follows a J-curve. Capital calls and acquisition costs mean there are net cash outflows in the first years. Depending on market conditions, capital calls may occur sooner or later. Only when the distributions exceed the capital calls do the cash flows from the fund turn positive. This is usually the case from about the middle of the term.

The world of private markets opens up various opportunities for you to include assets not available on public exchanges in your overall portfolio. First, you face the decision of which investment approach is right for you. You need to consider the following aspects:

• Fund size
• Management expertise
• Degree of control
• Time horizon

In addition, private market investments can be divided into four different strategies:

• Private equity (capital investments in unlisted companies)
• Private debt (debt securities)
• Private real estate (real estate)
• Private infrastructure (acquisition of equity interests in infrastructure objects)

Various investment instruments are available for each strategy:

• Direct investment: Investing directly in private companies and assets as an individual does not just require substantial financial resources. For example, when it comes to evaluating a company, you need the appropriate knowledge, experience and a network.
• Co-investments: With a co-investment, you do not invest in a company alone but take an active role directly alongside private market fund managers who, as general partners, are responsible for managing the fund.
• Feeder funds: Compared to the usual private market funds, feeder funds are open to a significantly larger group of investors. Such funds pool capital and invest it in different assets such as stocks, bonds, commodities or real estate. Investors gain access to various investment opportunities and markets through the expertise of professional fund managers, usually from banks such as UBS.
• Fund of funds: A fund of funds or umbrella fund allows you to invest in various funds with different investment strategies. Due to this broad diversification, this investment model can be particularly attractive for first-time investors. Fund of funds are often less volatile compared to a single strategy.

Open funds: Unlike closed, illiquid private market funds, open funds do not have a fixed term, and shares can be bought and sold at any time. Usually, this happens on a monthly basis. Buyers enter an existing asset portfolio and immediately start participating in potential distributions.